Investors Struggle to Overcome Impact’s Growing Pains
Asset owners urged to set holistic goals, managers encouraged to innovate, after GIIN report highlights measurement challenges.
Impact investing is becoming a central strategy for large asset owners globally, but divergence remains over how asset managers balance financial risk and return expectations with their clients’ impact-related goals.
Published last week, the Global Impact Investing Network’s (GIIN) ‘State of the Market 2024: Trends, Performance and Allocations’ report assessed shifts that investors are making in the measurement and management of their impact results, considering growth rates by sector and asset class.
When asset managers and owners were asked about challenges they encounter in their relationships with one another, 46% of investors said they had difficulty balancing financial risk and return expectations alongside impact expectations, and 30% said they found it challenging to align on which impact metrics to measure and manage.
“An asset owner, such as a pension fund, may have overall impact goals, but it is often the asset manager that has to grapple with how to actually implement those objectives in a practical way,” Dean Hand, Chief Research Officer at GIIN, told ESG Investor. “They have to manage the nuances of achieving a balance between returns, risks and impacts as a dynamic set of factors – it’s challenging for them to do.”
Regional differences
GIIN found the issue more pronounced in an emerging markets context. Fifty-two percent of emerging market-focused investors reported challenges balancing financial risk and return expectations alongside impact expectations, whereas just 38% of developed market-focused investors said the same.
In addition, 31% of emerging market-focused investors revealed differing expectations between asset managers and owners regarding the timeline to achieve a desired impact, compared to 20% of developed market-focused investors.
Twenty-two percent of developed market-focused investors said they hadn’t encountered any relationship challenges at all, compared to 9% of emerging market-focused investors.
The GIIN report recorded growth in impact investing across a much broader range of asset classes, including public debt, real assets and public equity, which have grown over the past five years at a compound annual growth rate of 32%, 27% and 19% respectively.
Among investors who have responded to the 2019 and 2024 impact investor surveys, impact-focused AUM has seen a 14% compound annual growth rate overall.
“Even if we had a commonly accepted framework [for impact investing], asset managers would still be in a tough spot,” said Fabrizio Ferraro, Professor of Strategic Management at IESE Business School, the graduate business school of the University of Navarra.
A number of industry bodies have developed impact-focused standards and are now focused on alignment and standardisation – this includes the recent memorandum of understanding between Global Reporting Initiative and International Foundation for Valuing Impact.
Part of the problem is that asset managers serve a diverse set of customers with conflicting beliefs and ideologies, which makes it more difficult to achieve a fair balance between profitability and impact, he argued.
This year’s investor sample for the GIIN report involved 305 impact investing organisations each managing more than US$10 million in impact-focused assets or at least five impact investment transactions. Seventy-three percent were asset managers.
Working in harmony
Bella Landymore, Co-CEO of the UK-based Impact Investing Institute (III), said that asset managers need to do more to seize the opportunities of impact investing, asserting they should leverage their position and expertise to pioneer innovative approaches.
“From product creation in new areas – like place-based finance, just transition investing, and natural capital – to the integration of impact metrics, adoption of new technologies, and engagement and stewardship activities, asset managers can deliver investment strategies that align with their clients’ priorities to create long-term value creation and sustainable economic growth,” Landymore said.
If the asset owner and manager in question have a strong relationship and good communication, often they can fix upon solutions to impact-related friction, the GIIN’s Hand insisted.
“One of the pieces of work we’re doing at the moment is encouraging asset owners to set more holistic goals across their portfolio, adopting an impact lens across all holdings,” Hand said.
“This means the asset owner is having less siloed discussions about risk and return for a particular asset class but is instead adopting a whole-portfolio perspective which gives the asset manager better flexibility to actually play with some of the dynamics.”
Catherine Macaulay, Co-head of Impact Management at Schroders, told ESG Investor that the asset manager’s impact strategies all have a dual objective of both targeting competitive market returns and delivering measurable environmental and social outcomes.
“Delivering on both objectives is no small task and requires asset managers to possess expertise, resources, and skills in both fundamental and impact analysis, integrating these holistically into investment decision-making,” she said.
Popular choice
Large institutional investors are increasingly recognising the value of impact investing and are contributing to the market’s growth, according to Hand.
“The [impact] field’s rapid evolution is evidenced by increasingly sophisticated investment strategies, significant capital inflows, and improved standardisation efforts, demonstrating a compelling trajectory as impact investing becomes an essential component of the investment landscape,” agreed the III’s Landymore.
The III’s own research shows that the UK impact investing market has grown to £76.8 billion (US$100.96 billion) in assets under management as of the end of last year – representing a 10% compound annual growth rate from the beginning of 2021 to the end of 2023.
Separate research by Better Society Capital has found that social impact investing reached £10 billion in the UK by the end of 2023.
Impact measurement and management processes have also improved, the GIIN report confirmed.
Forty percent of surveyed investors verified their impact measurement and management processes through a third party – 27% did the same for their impact results.
In addition, over two-thirds of investors said they are incorporating impact criteria into their investment governance documents, signalling a shift toward formalising impact considerations in their decision-making processes.
In 2025, GIIN will further research impact measurement and management, focusing on practices and performance.
“We’re also going to focus on the behaviours of asset owners and their execution of [impact investing strategies],” Hand added.
“Impact investing as a strategy in the current context of the world we live in is inevitable,” she insisted. “All policy and frameworks that are being developed are driving towards reshaping financial markets where impact as a solution-orientated approach is part of every investment decision by default.”
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